1/ The 2021-23 inflation in a nutshell. A policy-induced expansion in demand coincided with pandemic-induced sectoral demand disclocations and supply constraints. Lower immigration, virus, and early retirements shrank labor force. Supply curves are short-run vertical... 2/ ... so this caused a large price level increase. The transitory hypothesis said with time supply curves would flatten out. With inflation expectations anchored, the price level would stabilize/fall and inflation drop back.

1/A few years ago Xi said, "The East is rising, the West is declining." Looks like hubris now w/ China's economy struggling, U.S.' humming. China may never displace U.S. as world's economic leader, but its manufacturing will keep it a threat. My deep dive: wsj.com/economy/why-xi… 2/ China's GDP has slipped to 64% of US level from 75%. It may one day rebound to 100% but has no plausible path to 150%-200%, Logan Wright of @rhodium_group tells me. "Beijing will never be able to make a credible claim to global economic primacy."

1/ The unemployment rate is the cleanest indicator of labor demand and supply and its 0.5 pp rise since April clearly signals the economy is growing below trend and perhaps headed towards stall speed, in contrast to signal from payrolls. 2/Unemployment rose because household employment fell, as did labor force. I don't read too much negativity into that; the two are noisy but correlated, which is why I focus on the unemployment rate. Also, household employment adjusted to payroll definition rose 188,000...

1/@JakeSullivan46's new article in Foreign Affairs is the de facto Biden Doctrine. He shows how Biden's foreign policy choices represent his approach to sustaining American power in its third post-war phase ...foreignaffairs.com/united-states/… 2/ Phase 1: Truman - 1980s, focused on building up democracieds and containing USSR; Phase 2 - the hyperpower preoccupied with building the institutions of globalization. Now: competition and interdependence...primarily with China ...

I'm in a contrarian state of mind today. I think the job market is not as strong as the headline payroll number suggests. Here's why. 1/ First, household employment was only up 86,000, and adjusted to payroll concept, was actually *down* 7,000. 2/ This is why unemployment stayed at recent high of 3.8%. It was NOT because of labor force, which grew a trend-like 90,000. Participation was flat.

1/ Michael, we agree productivity and wages are linked. You say raise wages, productivity will follow. I say the opposite. I can see a case for either, but if you raise wages and productivity doesn't follow, that's a recipe for disaster. Which is what I fear is happening.

https://twitter.com/michaelxpettis/status/1704789534372692271

2/ Does protection raise productivity and wages? If that were universally true, India and Brazil would have the world's highest wages. It worked for east Asia because it went hand in hand with export orientation, high investment, and businesses that learned & adapted quickly.

1/ I get why auto workers think they deserve a raise, or fewer hours. Isn't everyone else getting that? But the reality is the opposite: pay must track productivity and American factory managers' and workers' productivity is not keeping up. My column. wsj.com/economy/americ… 2/ The data isn't great, but what we have is sobering. Manufacturing productivity has barely advanced since 2009, and lagged other countries. In motor vehicles, it's actually fallen.

The smart people said to ignore Fitch's downgrade of the U.S. credit rating. I'm less sanguine. The circumstances are completely different from 2011 when S&P downgraded the U.S. The fiscal situation is much more worrisome. My column explores. wsj.com/articles/fitch… 2/ True, Fitch didn't tell us anything we didn't already know. And ratings are of questionable value on sovereign local currency debt which is virtually impervious to default. But it joined an accumulation of red flags. For instance ...

Did pandemic or stimulus cause the inflation? Ben Bernanke & @ojblanchard1 conclude: pandemic caused the initial surge, stimulus sustained it. To me theirs is the most satisfying take yet on the inflation surge. wsj.com/articles/why-i… 2/ For Blanchard, this represents a change in views. He famously predicted in 2021 that the Biden stimulus would overheat the labor market and drive inflation up. But in this paper he acknowledges that's not the mechanism that drove inflation in 2021. brookings.edu/wp-content/upl…

The Fed has a problem with inflation and banks. Congress and Biden have a problem with the debt ceiling. A deal to cut federal spending could address all of them. wsj.com/articles/a-deb… 2/ Biden doesn't want to negotiate: the nation's full faith and credit should not be a bargaining chip. And his team thinks the spending caps Obama agreed to with Rs in 2011 were a mistake; it saddled US with austerity at worst possible time.

India's population may have surpassed China's this month, an event heralding a major shift in the global order. “We are on the cusp of maybe the most momentous population transition of the last 200 years." By @ByShanLi and @QiLiyan 2/ India’s rising population means it’s likely to keep its economy growing, buy more of the world’s goods and play a bigger role in global affairs, even as it grapples with poverty and a lack of jobs. Meanwhile ...

1/ This is more of a question than a thesis, but I wonder if monetary policy transmission may be evolving now, back to something more like the pre-1982 world when money and credit mattered, not just interest rates. 2/ Some context: central banks have long assumed their only monetary instrument was the interest rate. Quantitative measures like reserves, reserve ratios, money multipliers etc had no independent effect. Rates drove nominal demand which drove money and credit, not vice versa.

Acute phase of banking turmoil may have passed, but years of consolidation, shrinkage and credit restraint may await. Many banks are exposed to same factors that brought down SVB, Signature - duration mismatch, uninsured deposits, tech-facilitated runs. wsj.com/articles/a-rap… 2/ Whereas S&L crisis, GFC was mostly about credit, banks' issue now is mostly about liabilities. QE, pandemic relief flooded banks with deposits which are now leaving b/c of QT, rising money market rates.

We've seen this before. Fed's experience in 07-09 told it shadow banks, structured products and too-big-to-fail banks were the weak links. Turns out it's boring old bonds, deposits and smaller regulated banks. My column explains. wsj.com/articles/svb-f… 2/ What could be safer, post-GFC, then a regional bank taking in deposits and investing them in government bonds? Well, a safe strategy taken to extremes becomes unsafe. (#Foolproof). Buying zero risk weighted Treasury & agency securities seemed safe so banks loaded up ...

The problem with Phillips curve explanations for inflation surge, such as the paper presented at @ChicagoBooth IGM' #USMPF2023, is they largely ignore supply. @BostonFed prez Susan Collins presents a counterpoint here, noting key contribution of supply. bostonfed.org/news-and-event… "Unanticipated supply shortfalls...lowered capacity relative to pre-pandemic trends ... it is difficult to
assess extent, duration of supply challenges in real time – esp. if they depend on pandemic dev'ts, unexpected shocks such as Russia’s war in Ukraine." - Susan Collins

My takeway from India trip: the familiar story of great potential held back by lousy infrastructure, burdensome regulation and inward orientation needs to be retired. Recent economic performance and reforms position it as true economic heavyweight wsj.com/articles/as-in… 2/ India will be fastest growing of 30 major economies in 2023-24, IMF says. Last year became 5th largest economy by $ GDP (passing UK), could be 4th by 2025.

1/ To me, whether crypto has *some* worth is the wrong question. It has facilitated some useful transactions and made possible some legit businesses. The question is whether those positives outweigh its negatives. For most durable innovations like the telephone, Internet...

https://twitter.com/BillAckman/status/1596509845699575809

2/ the positives clearly outweigh the negatives. For a handful, it’s the opposite: asbestos, fentanyl come to mind. So far, ransomware, money laundering, fraud and other negative use cases seem to collectively outweigh the positive use cases for crypto. wsj.com/articles/crypt…

The crypto meltdown did us a favor. Crypto became a $3 trillion asset class with bank-like intermediaries but few connections to actual banking. So its implosion has had no spillovers. My column explores: wsj.com/articles/how-c… 2/ Like banking, crypto is highly leveraged and interconnected; fire sales, contagion, caused one failure to ripple through to others. Crypto companies listed "customers" and other crypto companies as major creditors; no banks, as far as we can tell.

All politics are local, but incumbents this year are being cashiered by a global problem: inflation. Republicans tied inflation to Biden's $1.9T stimulus, but Biden isn't why core inflation is just as high in Canada, UK, Sweden, Australia. My latest: wsj.com/articles/midte… 2/ Biden isn't why Australia's center right government got turfed out in May over cost of living concerns, or why French, Italian and Swedish governing parties/coalitions all lost seats, or power, also over energy/inflation.

Americans inclined to blame their economic problems on American policies should check out how other countries are experiencing much the same thing.

https://twitter.com/GrogsGamut/status/1588348331612590080

From @RBAInfo's monetary policy statement: "Inflation is ... very high and broadly based ... After initially being predominantly driven by supply shocks, inflation is now spreading to more persistent non-discretionary items..."

Milton Friedman said inflation was always and everywhere a monetary phenomenon. No, said Thomas Sargent: it's always and everywhere a fiscal phenomenon. With deficits and inflation both too high, the fiscal theory of the price level is making a comeback. wsj.com/articles/to-so… 2/ FTPL bears a more than passing resemblance to MMT, in that both treat fiscal and monetary policy as indivisible. But whereas MMT says that justifies unlimited deficit spending until inflation erupts, FTPL says unlimited deficit spending guarantees inflation will erupt.